Bear Stearns pact boosts Calpine

LisaSanders

NEW YORK (MarketWatch) - Power generator Calpine said Thursday that it would create an energy marketing and trading business with brokerage Bear Stearns.

The deal is designed to reduce Calpine's collateral requirements and allow it to buy and sell natural gas and power, on a short-term basis, as an A-rated entity. Calpine is currently rated well below investment grade by major credit-rating agencies.

For its part, Bear Stearns will get a chance to more quickly become a leading player in the physical energy market.

Calpine
CPN, -0.13%
based in San Jose, Calif., saw its stock climb 16 cents to close at $3.10 on three-and-a-half times the average volume. Shares fell from a high of nearly $60 a share in 2001 to their present situation following the Enron-related collapse of the merchant energy sector.

Bear Stearns
BSC, +0.13%
and Calpine said CalBear Energy LP, a wholly owned subsidiary of Bear Stearns, will focus on physical natural-gas and power trading, as well as related structured transactions. Calpine Merchant Services, a wholly owned subsidiary of Calpine, will serve as the exclusive agent for CalBear.

CalBear is expected to begin trading in the fourth quarter. The two companies will split profits.

The transaction will help Bear Stearns "quickly become a leading provider of liquidity, execution and clearing services in the physical energy market without compromising our disciplined approach to risk and capital allocation," said Warren Spector, president and chief operating officer of Bear Stearns, in a statement.

Peter Cartwright, Calpine's chairman and chief executive, said in a conference call that one of the key features of the deal is the expected reduction in Calpine's collateral position. Calpine had to post collateral to enter into trades to assuage concerns about its junk-rated debt.

"Second, and very important to us, is an enhanced spark spread because of our ability under this new arrangement to trade as an A-credit entity," Cartwright added. A spark spread is the difference between what a company pays for natural gas and power and the profit at which it sells the resources.

No more prepaying for gas

The deal includes a $350 million credit agreement between CalBear and the Calpine subsidiary Calpine Energy Services, giving Calpine the ability to sell power and acquire natural gas for up to 61 days in advance through the energy-trading venture. That will eliminate the need for Calpine to prepay for its natural gas.

"As a reminder, Calpine currently prepays their post daily margin for a large portion of our gas purchases, and doesn't get paid for power until 20 days after the month," Calpine Energy Services President Paul Posoli said in the conference call.

Calpine expects to cut $200 million from the $500 million worth of collateral outstanding as of June 30 of this year by the summer of 2006. It intends to sell enough power through CalBear to fully utilize the $350 million of credit, Posoli added.

The credit agreement will replace a $200 million-plus line of credit with Deutsche Bank, which expires in October. Last year, Calpine created Calpine Energy Management to purchase natural gas.

"We have not had as much success with the CEM facility as we had hoped," Posoli said. "The reason that we're so much more optimistic about this structure is that we're going to be going out to our customers with a guarantee from Bear Stearns. With CEM we didn't have a guarantee. We didn't have a rating."

Though energy trading will be a focus, Calpine and Bear Stearns are not creating a hedge fund, Posoli stressed.

"Hedge funds will be our customers," he said. "This business is not being set up to bid on energy prices. We will work with our customers to capitalize on inefficiencies and arbitrage opportunities in the market, and focus on trades that leverage our expertise and information advantage."

Standard & Poor's called the deal somewhat favorable to Calpine's B-minus rating with a negative outlook with the prospect of greater liquidity for the company.

"Although Calpine has indicated that the trading venture should increase its profitability, Standard & Poor's views trading profits as unsustainable for rating purposes," S&P said. "Calpine will not be able to use the credit enhanced trading venture to enter into long term power-purchase agreements.

"In addition, the venture may increase Calpine's business risk as deal flow increases and the trading venture warehouses market risk to provide new services to customers."

However, the deal caps the potential downside risk to Calpine, S&P added.

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